[ET Net News Agency, 4 October 2018] Daiwa Research noted that city-gas distributors'
share prices have corrected by 11-19% in the past two days as investor concerns on a
connection fee cut intensify.
The research house believes upfront fees will be gradually cancelled across China, but
the earnings impact to HK-listed gas players is likely to be limited, given upfront fees
do not exist in many cities and hence only accounts for an insignificant portion of their
connection income.
Daiwa said ENN Energy (02688) does not collect any upfront fees. The research house also
sees the likelihood of cancellation of other parts of the connection fee as low because
the installation of gas asset within private spaces which are not compensated by the
distribution tariff.
Daiwa also said the actual opearting profit margin (OPM) of connection fee is less
lucrative at 34% (not a face value of 46%), implying limited room for a cut.
Assuming a 15% cut in connection fees (implying 19% OPM), Daiwa sees 10-19% cut in gas
distributors' 2020 net profit, which is already fully reflected in the 11-19% decline in
share price since 27 September.
It thus advised investors to tap into the strong gas consumption growth in China through
names through Kunlun Energy (00135) and CIMC Enric Holdings (03899), rather than the pure
city-gas distributors. (KL)